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The future of platforms – from Dr Beeching to HS2

In a commoditised world, a platform is just another bit of kit, argues Tim Sargisson – so, if you are prepared to pay for a licence for a back office, why not build or license your own platform?

My previous two blogs both focused on platforms. In May, I looked at the FCA’s concerns about platforms and then, last month, I questioned how platforms continued to demonstrate being fit-for-purpose. This time, I want to look at the future landscape for platforms – and before we see the consequences of the FCA’s Investment Platforms Market Study, announced earlier this week.

It was the late, great Henry Ford who said: “If I had asked people what they wanted, they would have said faster horses.” And if the early pioneers of platforms had asked the average adviser what they wanted, what odds the answer would have been “more commission”?

Certainly, it is unlikely the response would have been: “A service to aggregate clients in order to get efficiencies and reduce prices, then ‘disaggregate’ the deal into a client’s individual account.”

Compare and contrast with the pre-platform world, which was very cumbersome. This relied on forms being completed and signed and sent by post between the investor, adviser and investment company. Individual investments had to be made on individual forms, with individual cheques, and sent to individual investment companies. It was akin to moving goods via a network of canals, before the arrival of steam.

The real game-changer with platforms was achieved through the aggregation process, which shifted responsibility for administering and looking after investments onto the platform. This in turn allowed discounts to be negotiated with fund managers and enabled a margin to be paid to the adviser through the introduction of fund-based commission. It was win, win, win all round – for the adviser, the fund manager and the customer – and all this at no extra cost.

I remember at the time there was a real ‘wow’ factor and it was huge, because platforms completely transformed the way advisers did business. Having seized the initiative, however, the platform space has failed to ‘kick on’ and truly evolve.

I agree we have seen greater numbers of players entering the market, with greater functionality, plus a wider range of funds and keener pricing, which all sounds great. But what this has led to is ‘excess capacity’ and when this arises what we tend to see is little price competition.

A focus on service 

The drivers of platform choice reinforce this. According to Platforum’s 2016 UK Adviser Platform Guide, advisers focus on service nearly as much as charges, functionality and investment choice. The situation is further distorted by regulatory pressures – and the situation where 83% of advisers surveyed by Platforum view their primary platform as their preferred platform and where one platform stands out, with 55% of advisers choosing it as their number one.

In other words, a whole heap of effort is expended by platforms on advisers who only include them on their list because it helps demonstrate independence. Even as first choice, the big players dominate and these two factors taken together means it is unlikely numbers of platforms will see the asset flows to support all that effort.

But service as a differentiator does not provide a sustainable business model – particularly in a market where firms have focused on aiming at ordinary profits rather than maximum profits. As such, a ‘Dr Beeching’ scenario is for the excess capacity to be removed by numbers of platforms closing to new business and folding in with somebody else, who, inevitably, cannibalise the best bits and grab distribution. These ‘super’ platforms may ultimately provide a super-slick, super-fast HS2 equivalent, which is fine if you want to go from London to Birmingham.

Ultimately, in a commoditised world, your platform is just another bit of kit. If advisers are prepared to pay for a licence for a back office why not build or license your own platform?

Pay for the bits you want, ensure full integration with your CRM system, outsource custodianship to a big financial institution, access the funds that work for your clients and forget the 3.000-plus funds that don’t – and price it competitively. Above all take control. At Sandringham this is our preferred approach and it works a treat.

Published on 19th July

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